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Posted on: 15 October 2015

One of the major draws of payday loans is the fact that people can get loans without undergoing credit checks required by banks and other financial institutions. In fact, the majority of payday loan companies don't pull credit reports from the big 3 agencies, so even people with bad credit can be approved for loans. However, paycheck loan lenders do check other resources to help them determine a person's creditworthiness. Here's what you need to know about this.

Alternative Credit Requirements

While cash advance companies don't check applicants' credit scores from the major agencies, they do use some lesser-known consumer reporting agencies to screen customers. Typically, these alternative agencies collect information about people's histories with payday lenders and other companies that specialize in offering no- or poor-credit financing options such as rent-to-own businesses. If a person's name is flagged in one of these systems, the payday lender will typically decline the individual's application.

Another thing that payday lenders sometimes check is whether you have loans with other providers. Some of these companies prefer customers didn't take out concurrent loans with multiple providers, because it reduces the individuals' ability to pay. These companies may use a system that lets them check if customers have outstanding loans out with other providers and decline applicants that do.

A third thing that payday lenders have been known to check are customers' banking histories. Many providers ask customers to submit their bank statements to prove they have active checking accounts. However, sometimes providers also look to see if the applicants have had any bounced checks, which may indicate the individuals are not financially responsible. If the person has bounced too many checks within a certain time period, then his or her application may be declined.

Payday Loans Can Affect Your Credit

Although payday lenders don't require applicants to have good credit in the traditional sense to be eligible for loans, the way people handle their accounts with these providers can affect their credit scores. If you default on the loan, the company may report this to each of the big 3 credit agencies. Since your payment history accounts for 35 percent of your credit score, a negative mark in this area can drag your number down significantly and make it difficult to qualify for traditional credit.

You may also receive additional dings to your credit if the defaulted loan goes into collections and/or the company sues you in court to collect the balance owed. Negative information can remain on your credit report for up to 7 years; though the older the item is the less impact it has on your overall score.

What to Do When Your Loan Is Declined

If you're application for a payday loan is declined, the company is required by law to tell you if a consumer report factored into its decision and give you the contact information of the credit reporting agency it used. Even if you choose not to continue pursuing the payday loan, you should order a report from the credit agency to see what type of information it has collected on you.

First, mistakes happen all the time. If you've never done business with a payday lender before, then the negative information may either be an error or the result of identity theft. If this is the case, use the tools provided by the credit agency to dispute the errors and wipe your report clean.

Second, other lenders such as rent-to-own businesses and some auto lenders use these alternative agencies to approve loans for people with less-than-perfect credit. So taking time to clean up your report with these agencies can help you get approved for much-needed financing at other types of businesses.

For more information about payday loan credit requirements or how payday loans impact your credit, contact a lender like Payday Express.